Question & Answer: The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: Assume that direct labor is a variable cost……

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: Beginning inventory Units produced Units sold Selling price per unit Selling and administrative expenses: 25,200 23,600 $428 Variable per unit Fixed per year 16 $401,200 Manufacturing costs: Direct materials cost per unit Direct labor cost per unit Variable manufacturing overhead cost per unit Pixed manufacturing overhead per year $ 281 53 40 $378,000 Assume that direct labor is a variable cost. Required: a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing c. Prepare an income statement for the year using variable costing d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above

The Dorset Corporation produces and sells a single product. The following data refer to the year just completed: Assume that direct labor is a variable cost. a. Compute the unit product cost under both the absorption costing and variable costing approaches. b. Prepare an income statement for the year using absorption costing. c. Prepare an income statement for the year using variable costing. d. Reconcile the absorption costing and variable costing net operating income figures in (b) and (c) above.

Expert Answer

 

Answer a
Computation of unit product cost under absorption costing and variable costing
Absorption Costing Variable costing
Direct Material cost per unit $281.00 $281.00
Direct Labor cost per unit $53.00 $53.00
Variable Mfg overhead cost per unit $40.00 $40.00
Fixed Mfg Overhead cost per unit $15.00 $0.00
Unit Product Cost $389.00 $374.00
Fixed Manufacturing Overhead cost per unit = Total Fixed Manufacturing Overhead cost/units produced = $378000/25200 units = $15
Answer b
Computation of Income statement for the year using absorption costing
Sales (23600 * $428) $10,100,800
Less : Cost of goods sold (23600*$389) $9,180,400
Gross Margin $920,400
less : Selling and administrative cost
– Fixed Cost $401,200
– Variable Cost $377,600
Net Income $141,600
Answer c
Computation of Income statement for the year using variable costing
Sales (23600 * $428) $10,100,800
Less : Cost of goods sold (23600*$374) $8,826,400
Less : Variable selling and admin expenses (23600 * $16) $377,600
Contribution Margin $896,800
less : Fixed Costs
Fixed Mfg Overhead cost $378,000
Fixed Selling and admin.cost $401,200
Net Income $117,600
Answer d
Reconciliation of the absorption costing and variable costing net operating Income
Absorption costing Net Income $141,600
Less : Fixed manufacturing overhead included in closing Inventories (1600 *$15) $24,000
Add : Fixed manufacturing overhead included in beginning Inventories 0
Variable costing Net income $117,600
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